Site Navigation

Site Mobile Navigation

An Inconvenient Truth

There is so much about Fannie Mae and Freddie Mac that we should be angry about.

In their heyday, these strange hybrids — part corporation, part government agency — were the biggest bullies in Washington, quick to bludgeon critics who dared suggest that their dual missions of maximizing profits while making homeownership affordable for low- and moderate-income Americans were incompatible. They steamrolled their regulator and pushed back at any suggestion that their capital was inadequate.

For years, they essentially wrote most of the legislation that affected them, which they larded with loopholes. In the mid-2000s, they had giant accounting scandals. Eventually, their quest for profits led them to make a belated, disastrous foray into subprime mortgages, which ended with their collapse, and which has cost taxpayers about $150 billion. Tragically, Fannie and Freddie could have led a housing recovery — if they hadn’t become crippled wards of the state instead.

Yet these real sins have been largely overlooked in favor of imagined ones. Over at the conservative American Enterprise Institute, two resident scholars, Peter Wallison and Edward Pinto, have concocted what has since become a Republican meme: namely, that Fannie Mae and Freddie Mac were ground zero for the entire crisis, leading the private sector off the cliff with their affordable housing mandates and massive subprime holdings.

The truth is the opposite: Fannie and Freddie got into subprime mortgages, with great trepidation, only in 2005 and 2006, and only because they were losing so much market share to Wall Street. Among other things, the Wallison-Pinto case relies on inflated data — Pinto classifies just about anything that is not a 30-year-fixed mortgage as “subprime.” The reality is that Fannie and Freddie followed the private sector off the cliff instead of the other way around.

Nevertheless, Wallison, who was a member of the Financial Crisis Inquiry Commission — charged with investigating the root causes of the crisis — wrote a 99-page dissent when the F.C.I.C. issued its final report, claiming it was all Fannie and Freddie’s fault. In a column I wrote at the time, I described Wallison’s dissent as a “lonely, loony cri de coeur.” He’s been trying to get me to take it back ever since.

In unveiling the lawsuit, Robert Khuzami, the agency’s enforcement chief, said that the S.E.C.’s action showed that “all individuals, regardless of their rank or position, will be held accountable.” Not really. What it shows is how desperate the S.E.C. has become to bring a crowd-pleasing case.

The complaint is extraordinarily weak. Taking its cues from the Wallison/Pinto school of inflated data, it claims that Fannie and Freddie failed to reveal to investors the true extent of their subprime portfolios. To make this claim, however, the S.E.C. has included categories of loans, such as so-called Alt-A loans, that may have had a subprime characteristic, such as low documentation, but which were often made to borrowers with high credit scores.

An error has occurred. Please try again later.

You are already subscribed to this email.

There are no damning internal e-mails in the complaint, with executives contradicting their public statements, and no examples of sleazy insider stock sales. A quick look at Fannie and Freddie financial disclosure statements shows that they clearly laid out the credit characteristics of their mortgage portfolios, even if they didn’t label every non-30-year-fixed loan as subprime. More than a year ago, a federal judge presiding over a shareholder lawsuit against Fannie Mae threw out the allegations surrounding lack of disclosure. Why? Because, he said, the company’s disclosure of its subprime portfolio had been adequate.

There is something else missing from the S.E.C. complaint, which Wallison and Pinto also conveniently ignore: default data. The truth is, for all their mistakes, Fannie and Freddie had some scruples about the nonprime loans they guaranteed or bought — and they have the default numbers to prove it.

For instance, according to David Min, a leading Wallison critic at the Center for American Progress, as of the second quarter of 2010, the delinquency rate on all Fannie and Freddie guaranteed loans was 5.9 percent. By contrast, the national average was 9.11 percent. The Fannie and Freddie Alt-A default rate is similarly much lower than the national default rate. The only possible explanation for this is that many of the loans being characterized by the S.E.C. and Wallison/Pinto as “subprime” are not, in fact, true subprime mortgages.

After the S.E.C. filed its charges on Friday, I received an e-mail from Wallison, suggesting that the complaint proved that he had been right and that I had wronged him. I now concede that he is half-right. Loony though his theory may be, he’s sure not lonely anymore.

A version of this op-ed appears in print on December 20, 2011, on Page A33 of the New York edition with the headline: An Inconvenient Truth. Today's Paper|Subscribe